RBI takes steps to ease liquidity, to buy Rs 8,000 crore bonds

Mumbai: Worried over a spike in interest rates in the wake of steps to support the falling rupee, the RBI on Tuesday announced a slew of measures, including Rs 8,000 crore bond buyback, to ease liquidity and ensure adequate credit flow to the productive sectors of the economy.

The Reserve Bank will conduct open market purchase of government bonds of Rs 8,000 crore on August 23 to inject liquidity, the Central Bank said in a statement. More Open Market Operations (OMO) would be undertaken as and when required, it added.

The measures are aimed at addressing the liquidity problem in the market which has worsened after RBI's money tightening steps, including raising short-term rates, to curb volatility in the exchange rate of rupee. The RBI further said the hardening of long-term yields "has resulted in banks incurring large mark-to-market (MTM) losses in their investment portfolio ... these MTM losses are partly resulting from abnormal market conditions and could be expected to be largely recouped going forward".

The RBI has also decided to retain the statutory liquidity ratio (SLR), the portion of total deposits banks are required to park in G-Secs, at 24.5 percent to help banks reduce MTM losses resulting from abnormal market condition.

With regard to SLR requirement, RBI said it has now been decided to relax this requirement by allowing banks to retain SLR holdings in Held To Maturity (HTM) bonds category at 24.5 percent until further instructions. "Banks have the option of valuing these securities for the purpose of such transfer as at the close of business of July 15, 2013," it said.

"It is important to address the risks to macroeconomic stability from external sector imbalances. At the same time, it is also important to ensure that the liquidity tightening does not harden longer term yields sharply and adversely impact the flow of credit to the productive sectors of the economy," it said.

Earlier in the day, rupee plunged to sub-64 level before recovering to end the day at 63.25 against dollar.